Bank Of America (BAC): An Audacious Plan To Pay Back The Government

Bank of America (BAC) is hinting strongly that it plans to pay back the US government the $45 billion that it owes by the end of this year. Bank stress tests showed that B of A needs to raise $34 billion. Somehow the financial firm believes that it can turn around and quickly pay off an extraordinary obligation.

The FT reports that B of A is doing better raising capital than it expected. It has floated 800 million shares recently on top of a public offering of stock earlier this month. The firm has also sold a portion of its investment in China Construction Bank which should net it $4.5 billion. There are plenty of rumors that B of A is prepared to auction off a number of other valuable assets.

The B of A plan to wipe out its government obligations will likely run up against the realities of the credit and financial markets along with the troubles of a deteriorating economy. The firm still holds billions of dollars of toxic assets which could be affected by the falling real estate market. B of A also has exposure to credit card debt, commercial real estate, and LBO loans made two or three years ago.

Former Fed chief Alan Greenspan recently notedthat the private banking system in the US is still grossly underfunded. He claims that this lack of capital will continue to depress lending to businesses and consumers potentially extending the length of the recession. Greenspan has been wrong about a number of his predictions, but a significant group of bank analysts share his views.

B of A could still face tens of billions of dollars of losses this year. There is some chance that if it is hit by significant write-offs in its consumer credit or real estate portfolio that it may have to go back to the US government for additional funding.

The chances that B of A can come up with $45 billion are probably less than 50/50 unless the American economy makes a miraculous recovery.

Douglas A. McIntyre